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Copyright December 7th, 2011

Trading wiTh oTher people’s money

The Collapse of the - WORLD Financial System

Why MF Global is worse than Europe

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Copyright Martin Armstrong All Rights Reserved December 7th, 2011

Trading wiTh oTher people’s money

The Collapse of the - WORLD Financial System

Why MF Global is worse than Europe

http://www.youtube.com/watch?v=Lcin5zQ7Gkw

The shocking collapse of MF Global with the amount of missing client funds now rising to $1.2 billion, is

so devastating, we are at the precipice of complete financial disaster. The United States boasts far too

much of its greatness and “liberty and justice for all” but its actions reveal nothing but greed, distain,

and contempt of the rights of man that include his right to property. Jon Corzine was a bond trader at

Goldman Sachs and has been known as an aggressive trader all along. He intervened at the SEC and

changed the direction of MF Global. What is at stake now is exposing the political corruption of the New

York media, courts, Justice Department, Commodity Futures Trading Commission, Securities Exchange

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Commission, and political process has come together in such a way that the fate of the nation is truly

hanging in the balance. Why do I make such a bold statement? The failure of the clearing houses to step

up and honor the trades is devastating. The conduct of the SEC and CFTC is despicable and how can you

place ANYONE at the helm of either “regulator” who would EVER be in a position to have to recuse

himself as the Commodity Futures Trading Commission’s chairman, Gary Gensler has done for being ex-

Goldman Sachs? Gensler can claim he recused himself, but that is bullshit for how can he do that and

still run the Commission? He was replaced by Jill E. Sommers who previously worked for Chicago

Mercantile Exchange, where her responsibilities included overseeing regulatory and legislative affairs

for the exchange and working closely with congressional staff drafting the Commodity Futures

Modernization Act of 2000. So now we have Sommers who clearly has a

conflict of interest as to the failure of the CME to conduct auditing and to

allow such trading with client’s money in the first place.

Finally, the CFTC passed a measure that at long last required brokers not

trade with client’s money by a 5-0 vote AFTER THE FACT! The rule was

initially proposed by the CFTC in October 2010 and it took MF Global to at

last establish this precedent. In my own case, the CFTC made that a

primary allegation (failure to segregate) and used this as the justification

to ask for a receiver to seize the company. It has NEVER been a crime. In

my own case it becomes clear that Bloomberg News simply always refused

to EVER even print my defense and ignored the very plea that stated

clearly that the segregation of funds was NEVER concerning accounts of Princeton Economics but that it

was Republic National Bank that had then used our accounts for their own benefit precisely as MF

Global. Since the CFTC just now is making it a violation to trade with client’s money shows how it has

been a COMMON practice all along.

Of course anything that tells the truth

about New York is not newsworthy in the

eyes of Bloomberg News when it exposes

the banks – their clients. This bias strips

them of any justification to dare call

themselves journalists. This is what I had

to read in a script written by the

government no different from a hostage

held by Iran put before the media to read similar scripts. But these were the words the government gave

me to read where they could not trace 10 cents to any personal account of mine, but everything was

taken by Republic. When they first ran to the government after my lawyers filed notice we would sue on

this issue of trading with our funds, they told the government I conspired with the THEIR OWN

employees to hide their trading from the Japanese. That would sound good if the accounts belonged to

the Japanese. Once they could not get around the fact we purchased portfolios and the accounts did not

belong to the Japanese, they would never go to trial.

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Conflicts of Interest in New York are no longer reason to prevent rigging

the game. In our own case, Andrew J. Geist was then at the SEC and was

the Senior Associate Regional Director for Enforcement in the SEC’s

Northeast Regional Office. This is the man that authorized filing the case

and seizure of Princeton Economics. Aside from the fact that this man

wanted the US Constitution suspended and that the company was to be

denied the right to hire a lawyer, he then directed that O’Melveny &

Myers LLP be the lawyer for the receiver he also picked, Alan Cohen who

is head of Global Compliance of Goldman Sachs. After that is

accomplished, he then quits the SEC and becomes a partner in O’Melveny & Myers, LLP the very law

firm he selected. In Armstrong v. McAlpin, 625 F.2d 433 (2d Cir. 1980) (no relation) it was held that

former government lawyers cannot then participate in the same case. The Model Code of Professional

Responsibility forbids a former government attorney from accepting private employment in the same

matters for which he had substantial responsibility while working for the government. Violation of this

rule requires the former government attorney's disqualification from the case at issue. The Code also

provides that if an attorney is disqualified under any of its rules, then all associates or members of his

firm should be disqualified (MODEL CODE OF PROFESSIONAL RSPONSIBILITY DR 5-105(D)). They just do

not care in New York and if you raise the issue, the judge will not

address it and he then gets pist-off at you and will retaliate.

The same was true about Hank Paulson claiming to be Secretary of

the Treasury, who signs conflict of interest restrictions regarding

Goldman Sachs upon taking office, but when the meltdown takes

place gets everything was waved so he could deal with the very firm

at the very moment of conflict! This status of Goldman Sachs Alumni

infiltrating the executive functions (non-elected) both in America and

Europe is threatening our very way of life. Enough is enough. We do not need recusals and

unenforceable conflict of interest covenants that are inevitably waived when the Justice Department

would never prosecute a violation anyway. We need HONEST government. We need the RIGHT to sue

the press for NOT reporting the truth before judges who have NEVER worked for government and are

NOT there for life.

The major New York Press groups are owned by major corporate players who are or were obviously

involved in the whole scheme. Take Bloomberg News where Michael

Bloomberg was a partner in Salomon Brothers who was discovered

manipulating the US government Treasury Auctions. This is why even

when Bloomberg News has been handed the very evidence that shows

the story is false and the choice is between reporting the truth or

supporting the corruption in New York, they refuse to publish the truth

claiming they “will not relitigate the case” which amounts to censoring

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the information that belongs to the public. This is the most tyrannical role that any press organization

can play and it precisely this lack of independence that threatens the entire world economy not just the

American people and their liberty. This bullshit about protecting the “club” in New York has got to stop

and when the press is bought and paid for, this amounts to against the right to a free society

to remain free. This is NOT performing the role of the First Amendment and the dishonesty of the NY

press has also become part of the whole problem that is destroying our way of life. This incestuous

corruption must come to an end!

The US conviction rate now stands in the Federal system at about 98.5%. While it is slightly lower than

that of Japan 99% or the Israeli military courts in the West Bank where the conviction rate is 99.74% for

Palestinians as recently published by the Israeli newspaper Haaretz where there were 9,542 cases in

2010, including over 2,000 involving "hostile terror activity," these rates of conviction warn that

government is out of control. Where the Israeli Military Court is ruthless with just 25 full acquittals, this

thirst for blood today is far worse than the most notorious court of Adolf Hitler, to put this in

perspective. Hitler established the People's Court (Volksgerichtshof) after the terrorist bombing of the

German parliament building, the Reichstag just as the USA set up Homeland Security and fingerprints

everyone just visiting the USA after 911.

Roland Freisler (1893–1945) was a prominent and notorious Nazi lawyer and

judge. He was State Secretary of the Reich Ministry of Justice and President

of the People's Court, which was set up outside constitutional authority. This

court handled political actions against Hitler's dictatorial regime by

conducting a series of show trials. The conviction rate was lower than most

governments today with approximately 90% of all proceedings ending with

sentences of death or life imprisonment. Between 1942 and 1945, more than

5,000 death sentences were handed out, and of these, some 2,600 through

the court's First Senate, which Freisler headed.

In Russia under the Communists the conviction rate was 90%. It is clear that whenever the judges are

appointed by government, the conviction rates rise. Thomas Jefferson was correct – no man can be

trusted for life. The conviction rate in China is 98%. A judge and prosecutor are there to vindicate the

government. When we consider these factors it becomes obvious that a fair trial is extremely hard to

obtain and is impossible in the federal system. The overall national conviction rate including states is

about 80% in the USA, but in the federal system it jumps to 98.5%.

We can see how this type of corruption can infiltrate the entire legal system that effect even the

financial markets because this is corruption that is political in nature. We have reentered a period of

legal corruption where they use the pretense of law to exploit the private wealth of citizens. It was

Edward Gibbon who wrote in the Decline and Fall of the Roman Empire; “Suspicion was equivalent to

proof; trial to condemnation. The execution of a considerable senator was attended with the death of all

who might lament or revenge his fate; and when Commodus had once tasted human blood, he became

incapable of pity or remorse.” (Vol I, Chapter IV, Part I). Today, if anyone is spared death or

imprisonment in the USA, it is considered “liberal” and the federal judge is not respected. Any federal

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crime even so minor traffic offenses on federal property are always accompanied by imprisonment even

if for just one week.

With the state of the law in America at this time, how is it possible to now trade in ANY “regulated” US

market when there is no rule of law? The keepers of the law are now bought and paid for. Federal

Courts are out of control and currently we are seeing the real mistake of allowing Congress to create

courts ignoring the spirit of the US Constitution. It was to be liberty and justice for all that was supposed

to be the top priority in creating the Federal Courts. The danger Congress created was the failure to

separate equity and law. At the time 1789 in England, there were two courts, Chancery and Law (King’s

Bench). Parliament wrote the LAWS and they were supposed to be enforced to the letter without

discretion. If the strict imposition of the law was somehow unfair, then you could go to the Chancery for

some relief. The Chancery Court had the power of discretion to make “equitable” decisions. Place both

types of courts in the same judge has been a total disaster and this threatens the entire global economy

as evidence by the MF Global debacle that is now calling into question the ability to even trade.

Under equity (chancery), the practice of using “discretion” has long been the doorway to abuse and

corruption precisely as we have today running wild in federal courts. As long as it serves Government,

the Senate Judiciary Committee will continue to allow the citizens to be abused to fill the coffers of

Government. The MF Global debacle is an example where they will not clawback funds from banks, but

are abusing the depositors instead. Charles Dickens wrote Bleak House in 1853 and in Chapter I he

states clearly the same corruption we face again today.

“This is the Court of Chancery, which has its decaying houses and its blighted lands in every shire, which has its worn-out lunatic in every madhouse and its dead in every churchyard, which has its ruined suitor with his slipshod heels and threadbare dress borrowing and begging through the round of every man's acquaintance, which gives to monied might the means abundantly of wearying out the right, which so exhausts finances, patience, courage, hope, so overthrows the brain and breaks the heart, that there is not an honourable man among its practitioners who would not give—who does not often give—the warning, ‘Suffer any wrong that can be done you rather than come here!’"

Unfortunately, the Constitution did not expressly state that the power of “Law and Equity” shall reside

in the separate courts. This has been our fatal mistake for it has allowed the same judge to use equity

“discretion” to ignore the “law” and that destroys our democratic system where the PEOPLE were to

make laws, not kings. But when “discretion” is used by judges, they are making law eliminating the

PEOPLE and converting the USA into a Judicial Dictatorship. Constitutionally, Congress NEVER had such

power to create a new combined court. Sir William Blackstone (1723-1780) makes that clear “For

though the king might erect new courts, yet he could not alter the course of law…” (Commentaries

Book III, Chapter 6, p84). Combining both in the same court destroyed law and created a hybrid court

that not even the king could have done, no less Congress, but what court would now agree?

“The judicial Power shall extend to all Cases, in Law and Equity, arising under this Constitution, the Laws of the United States, and Treaties made, or which shall be made, under their Authority” Article III, Section 2 did not authorize hybrid courts

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This “discretion” is why MF Global customers are getting

cheated! The rights, privileges, and immunities of ALL those

customers who simply had an account at MF Global are about

to get really screwed by the presiding Judge Martin Glenn

creating whatever it is that he thinks is fair (discretion), not

what the law says since he presides in equity (chancery). In the

United States, Congress vested both LAW and EQUITY in the

same courts. This has undermined everything. That means that

Congress can pass a law, and the judges do not have to obey

the law at all calling it their right of “equity” to determine if it is

what they would write. In MORRISON v. NATIONAL

AUSTRALIA BANK LTD., 558 US – (6/24/2010) the Supreme

Court overruled ALL securities law of the New York Second

Circuit because they were applying the law based upon what

they think Congress would like them to do. They have been creating “judicial law” in securities since the

beginning. This is so anti-Constitution and against the principles of any “democracy” because it

eliminates the people entirely. This becomes a judicial dictatorship no different than Gaddafi.

There is no actual law authorizing a “clawback” but the NY court will create whatever it wants. The New

York Bankruptcy Judge is Martin Glenn who was the very lawyer for the Receiver in the case of Princeton

Economics who defended Republic National Bank and HSBC. In this case, it was Glenn who argued for

the right of judges to imprison anyone for life until death without lawyers or trial by jury. The New York

Law Journal on January 7, 2002 reported that Martin Glenn argued for the contempt and reported it was

starting to “resemble a merry-go-round that never stops.”

When I offered evidence that Republic had stolen the money using it for its own trading the SAME as MF

Global, Glenn and his team replied that they “believed” Republic’s story and refused to allow ANY suit

against Republic. They were clearly trying to take everything for the banks and to cheat the Japanese. I

then had to do interviews with the Japanese press to tell the Japanese that Republic took the funds and

they should file suit in New York. Had they NOT filed in New York, Martin Glenn as the lawyer for the

receiver would have protected Republic National Bank to the death and aided them is keeping over $1

billion dollars, which seems to be going on with MF Global. If I was guilty, Republic kept the money. That

is what he was insisting.

This time, instead of being the lawyer defending the banks, Martin Glenn is now the judge presiding

over MF Global! Do you really think he will defend the clients or the NY banking community? In another

case his law clerk even wrote part of the brief of an adversary before Judge Glenn. He was asked to

recuse himself and refused, since judges can violate every sense of decency, morality, and sit in

judgment over themselves. If they were truly unbiased, then hand the case to someone else. They

refuse to recuse themselves because they want the case which confirms the bias in a self-fulfilling

prophecy. This is far too corrupt.

http://www.nysb.uscourts.gov/opinions/mg/104370_923_opinion.pdf

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Now we have the liquidator Trustee James Giddens of

MF Global has already been accused by some

customers of having a conflict of interest because of his

past work done for JPMorgan Chase & Co. in 2009 and

2010. He argued that this was less than one-tenth of 1

percent of his law firm’s total. JPMorgan, a lender to

MF Global’s parent company, in court papers after the

judge handling the bankruptcies ordered him to

describe his relationship with the biggest U.S. bank.

Customers have said he may have interests opposed to

theirs because of such work. You cannot represent

JPMorgan, claim they do not pay you that much, and

refuse to recuse when in fact the reward comes after

the case, not before. His refusal to recuse is once more

indicative of bias and he has refuse to qualify precisely

what he did for JPMorgan, while then conceding his

firm has “historically” represented that bank. It is

JPMorgan that is the agent to a $1.2 billion loan to the brokerage’s parent, MF Global Holdings Ltd., and

is allowing the company to use cash securing a loan that belongs to clients. By contrast, Giddens said

that he had “investigated and actively pursued claims” against the JPMorgan in his role as trustee of the

Lehman Brothers Inc. brokerage, settling for $860 million. But that was bank v bank. This is bank v

people who are normally screwed in New York courts to start with.

Giddens’ staff attorney James Kobak testified before the House Agricultural Committee on Thursday,

December 8th, 2011, stating that the total customer accounts at MF Global were "between $5.5 billion

and $6 billion", which is expanding the original $5.45 billion estimate from MF's primary clearinghouse,

the Chicago Mercantile Exchange who has utterly failed in its duty to protect investors. If this is correct,

then the missing customer funds may rise from $1.2 billion to nearly $2 billion. Kobak admitted the $1.2

billion shortfall estimate is fluid, since it had more than already doubled from the original $600 million

statements.

Giddens and several federal authorities are investigating the cause of the shortfall but they are not likely

to reveal the truth of what has become standard practice in trading with other people’s money. The

nightmare was customer accounts with open positions that became frozen. While Kobak is being

optimistic that total recoveries could be as much as 70 percent of accounts, he will not clawback funds

from other brokers or banks letting them keep their illegal gains.

The liquidation case is: In re MF Global Inc, U.S. Bankruptcy Court, Southern District of New York, No. 11-2790. Judge Martin Glenn

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Trading wiTh oTher people’s money

The International Loopholes That Are

Threatening the Entire Financial System

Whenever you get to play with other people’s money by force or scheme be it government, as Milton

Friedman eloquently said http://www.youtube.com/watch?v=k2Kg2SvsI8Q, or banks and brokers, as MF

Global has done, the end game is always tyranny. In the instant case of MF Global, there is a legal

loophole in international brokerage regulations that is time to explain before you leave a dime in ANY

New York operation. You should DEMAND from any broker a signed agreement that they will NOT invest

your cash or assets in any market, exchange, or transaction where your property is up for grabs based

upon their covert use of your money!

MF Global and virtually all of its Wall Street counterparts have been circumventing U.S. securities rules

at the expense of their clients for decades, and people like Judge Martin Glenn is by no means about to

change the game or expose what has been really taking place. Client funds were by no means just

inadvertently misplaced or gobbled up in MF’s dying hours as is being desperately portrayed by the NY

media once again covering up the truth. These were losses created by manipulation of brokerage rules

that allowed for the wholesale acquisition and sale of client funds through re-hypothecation. I was

aware of this for decades and purposefully purchased Fannie Maes, which were NOT AAA and could not

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be re-hypothecated by either posting them as collateral at the exchanges or in the REPO market. MF

Global, as other NY firms, used clients’ funds to finance an enormous $6.2 billion Eurozone repo bet that

was approved personally by Corzine. What this has amounted to is any win was to MF Global’s benefit,

while the losses belonged to clients. If the trustee is even correct and without going after other NY

bankers as Martin Glenn did in Princeton Economics, a 70% recovery means they still stole 30% of all

deposits when their bad trade was netted out. Nobody goes to jail, as was the case in Princeton

Economics since Republic & HSBC agreed to give back what they stole provided no director went to jail.

SO this is what Martin Glenn argued for in addition to indefinite detention with all constitutional rights

suspended until you die. We just cannot expect anything honest or upfront from Judge Glenn based

upon his track record. This is the guy who argued that since corporations have no rights to remain silent,

then nobody who works for a corporation does either. Investors should cite my case before Judge Glenn,

use his own words, and then move to imprison all corporate officers of MF Global until they die. He said

that was constitutional since corporate officers have no rights.

The MF Global use of customer funds has now reached at least $1.2 billion and the picture emerging is

precisely why I tried to prevent any re-hypothecation using Fannie Maes – because I knew it was a

systemic and widespread practice with other people’s money. In the early 1980s when interest rates

were high, Drexel Burnham gave me a choice to sell my cash at night as my accounts would be

automatically swept and I was paid a portion of the interest earned. As time passed, the brokers after

1987 no longer offered any such overnight rate and began to keep that interest for themselves. This has

been known among regulators for decades. This is not something new. The press like Bloomberg News

knew about this practice and nobody was willing to report it or direct that it stop especially when

Bloomberg himself was a partner in Salomon Brothers.

Up until now the assumption has been that the funds missing were simply misappropriated by MF

Global and any bankruptcy filing would not be justified. However, this is why so many conflicts of

interest exist in this case for they are needed to protect the other banks once again. That client money

should be taken back from the banks it was used for trading. In basic law, if someone steals your car,

repaints it, and resells it, once found, you still have the title. In this case, MF Global NEVER had TITLE to

those funds and they have to be returned to the clients and the counter-party bankers as a fundamental

matter of law cannot keep them.

“The interpretation of a contract is a question of law to de novo review on appeal.” SEC v Elliott, 953

F2d 1560, 1582 (11th Cir 1992). This is vital for nowhere in an account contract did the client authorize

MF Global to trade on its own account with the funds in the account. Without that written authority,

this is criminal fraud. The Trustee and the presiding Judge will do everything in their power to prevent

any true fair trial for clients and will usurp power that do not belong to them. “Whether property is part

of the bankruptcy estate is a factual issue for the jury in a prosecution for bankruptcy fraud.” US v

Dennis, 237 F3d 1295, 1300 (11th Cir 2001). This means a JURY constitutionally determines title

ownership – not judges! Guaranteed, the judge will block such a jury trial to protect the banks because

ALL client funds MUST be returned and the losses incurred in illegal trades MUST be borne by the banks!

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I reported on November 15th, 2011 from a very high inside source that Corzine met with the head of the

SEC Mary Shapiro to lobby against a rule that would have outlawed MF Global from trading using client’s

funds. Shapiro has denied that the collapse of MF Global was any failure on the part of regulators.

Corzine met with Shapiro and she personally stop the rule that allowed Corzine to trade with customer

funds. This is simply outrageous and shows why both the SEC and CFTC should be raze to the ground

with a new single regulator created with absolutely NO former SEC and CFTC employees need apply with

ALL employees signing contracts and are PREVENTED from ever working for ANYONE that is in the

industry or a law firm whose clients are in the industry. People should write to the Senate and House

Committees that oversee the SEC and CFTC and DEMAND that they do their f**king job or get the hell

out of Congress. This incestuous relationship crap between regulators and the big New York firms is

destroying the integrity of the financial system, the United States as a viable free nation, and is

becoming a warning beacon that people should not have any money in a system that is just this damn

corrupt. Shapiro’s denial that there is any fault on the part of the SEC to prevent this one is arrogant and

absolutely indicative of the crisis we face that the financial press refuses to expose for fear of hurting

their clients – the brokers and banks.

http://www.pbs.org/nbr/site/onair/transcripts/sec_chairman_mary_Schapiro_on_mf_global_111107/

MF Global was allowed to take customer funds for their own use and this has been allowed by the

regulators who are bought and paid for and have NEVER prevented a damn thing. MF Global plowed

money into an off-balance-sheet maneuver known as a repo, or sale and repurchase agreement. A repo

involves a firm borrowing money and putting up assets as collateral, assets it promises to repurchase

later. Repos are a common way for firms to generate money but are not normally off-balance sheet and

are instead treated as “financing” under accountancy rules. In this case, MF Global used the version of

an off-balance-sheet repo called a "repo-to-maturity." The repo-to-maturity involved borrowing billions

of dollars backed by huge sums of sovereign debt, all of which was due to expire at the same time as the

loan itself. Since the collateral and the loans matured simultaneously, MF Global was entitled to treat

the transaction as a “sale” under US GAAP. This is how MF Global moved $16.5 billion off its balance

sheet hiding its bets on Italy, Spain, Belgium, Portugal and Ireland.

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What has emerged is a liquidity swap that is this "repo-

to-maturity." In other words, no longer is a REPO

transaction simply a 24 hour swap market. We are now

extending REPO into a quasi-central bank function. The

ECB is being marginalized because of its structure since

its structure is different from the Fed lacking an elastic-

money supply authority. If the ECB runs out of cash, it

has to be recapitalized unlike the Fed. This has led to the

emergence of this new market for liquidity swaps "repo-

to-maturity" which has led to the UK's Financial Services Authority (FSA), to issue a report last July

pointing out the new risks in this development. Spreading the problem around, some U.S. banks are

jumping into the market entering into these liquidity swaps with European banks in the tens of billions

of dollars. In Europe, unsecured borrowing among banks was virtually non-existent. We are on the edge

here of a very serious economic implosion for this is the very market that enabled MF Global to implode

with other people’s money.

MF Global has exposed also the leverage employed by NY firms. In order to lose $1.2 billion of its clients’

money in the acquisition of a sovereign debt position of $6.3 billion, which was more than five times the

firm’s net worth, it exploits another loophole between UK and US brokerage rules on the use of client’s

funds known as “re-hypothecation”. In other words, the borrower pledges collateral to secure a debt

but he retains the title and the creditor technically has only a “hypothetical” control of the title to the

assets. The creditor may seize possession ONLY if the borrower defaults.

Here is the legal loophole between the US and the UK. In the U.S., this legal right takes the form of a lien

upon a specific asset while in the UK this is a floating legal charge. A floating charge is a security interest

over a fund of changing assets of a company or a limited liability partnership (LLP), which “floats” until

conversion into a fixed charge or specific lien, at which point the charge attaches to specific assets. The

conversion (called crystallization) can be triggered by a number of events. This it has become an implied

term in debentures (in English law) that a cessation of the company's right to deal with the assets in the

ordinary course of business will lead to an automatic crystallization. This is normally expressed in terms

of a typical loan agreement where the seizure of assets takes place upon default by the charger is a

trigger for crystallization. Such defaults typically include non-payment, invalidity of any of the lending or

security documents or the launch of insolvency proceedings. Under UK law, a floating legal charge can

only be granted by companies and cannot be sustained by an individual person or a partnership for in

such cases that entails a specific lien on assets.

This floating legal charge is known as "one of equity's most brilliant creations" and takes effect ONLY in

the absence of LAW. The Judiciary Act of 1789 that created the US district courts states clearly: “SEC. 16.

And be it further enacted, That suits in equity shall not be sustained in either of the courts of the

United States, in any case where plain, adequate and complete remedy may be had at law.” You

cannot eliminate the law of a statute by resorting to equity, yet this has become a treasonous standard

practice in America. This is at the heart of judicial corruption and tyranny.

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In other words, Americans harmed by MF Global

taking their assets would have had more rights in

Britain than in New York. In practice, as the

charger has power to dispose of assets under a

floating legal charge, this is only of any

consequence in relation to disposals after the

charge has crystallized. Since in the United States

they NEVER disclose that they are using client’s

money, under EQUITY there was no legal right to

the “re-hypothecation” of client’s funds since it

was not disclosed and the client did not relinquish

title to the assets and did not even lease them for

such use.

MF Global exploited a loophole between US and

UK law that is criminal. A mutual fund/hedge fund is legally different from a broker-dealer. There you

invest in the fund and receive shares. You have now relinquished the title to the assets and thus “re-

hypothecation” is expected for the fund manager is not managing your specific money differently from

another. However, when you open an account at the brokerage house or bank that account is your and

you did NOT relinquish title to the assets. Since they also do not disclose they are using your assets for

their own trading, you certainly did not give up your title and therefore they legally cannot engage in

“re-hypothecation” of your assets for their benefit. If any lawyer tells you different, get a new lawyer.

NEVER EVER use a law firm from the same city in which you are filing a suit. He will blow smoke up your

ass and “imply” how he knows the judge, the prosecutor, or whatever as if they were friends and that

inside position will benefit you in some way. That is a sales pitch that is bogus for it works in the

opposite manner. Because of those very relationships and the fact that the practice of the lawyer is in

that town, his business relationships long-term are more important to him than you one-time case. He

will never piss off the judge because he has to be before him on other cases. So NEVER use a firm from

the same city. It is a disaster.

Hypothecation of client assets takes place in investment banking, when assets deposited with a broker

may be sold if client fails to keep up credit payments or if the securities drop in value and the investor

fails to respond to a margin call (a request for more capital). Re-hypothecation occurs when a bank or

broker utilizes collateral posted by clients, including those of hedge funds, to back the broker’s own

trades and borrowings.

Even under the U.S. Federal Reserve Board's Regulation T and SEC Rule 15c3-3, a broker-dealer may re-

hypothecate assets to the value of 140% of the client's liability to the broker-dealer. In other words,

assume a customer has deposited $1000 in various securities and has a current debt deficit of $500,

resulting in net remaining equity of $500. The broker-dealer can then re-hypothecate up to $700 (140%

x $500) of these assets. This now leverages the taking of client’s money on an undisclosed basis.

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In the UK, there is unquestionably no statutory limit whatsoever on the amount that can be re-

hypothecated. In fact, brokers are free to re-hypothecate all and even more than the assets deposited

by clients is truly astonishing. However, at least there it is up to clients to negotiate a limit or prohibition

on re-hypothecation whereas in America it is not even disclosed. Therefore, US broker-dealers have an

advantage when opening a UK operation allowing them to bounce back and forth exploiting both

systems. Why do you think that AIG was operating in London? This irregularity of rules between the two

markets enables exploiting the UK regime very attractive to international brokerage firms to employ

European subsidiaries to create pools of funding for their U.S. operations, without the bother of

complying with U.S. regulations even if they did bother to enforce them.

This is why the collapse was so devastating following the 2007 high. The re-hypothecation in the REPO

market had grown so enormous also using the mortgage backed securities rated AAA amounting to half

of all the activity within this “shadow banking system” known as REPO. Prior to the Lehman Brothers

collapse, the International Monetary Fund (IMF) had actually calculated that US banks were receiving $4

trillion worth of funding through this re-hypothecation scheme, most of which was being sourced from

the UK. With even the mortgage backed assets being re-hypothecated many times over in London (the

“churn”), the original collateral being used may have been as little as 25% of the total volume reported

to have been $4 trillion. This is why $700 billion was needed in Tarp. Nobody was looking at just how big

the bailout had to be and behind the curtain the Fed and Treasury had to see this degree of leverage.

The fact that MF Global has blown-up, demonstrates that Congress did not address the real issues in this

whole mess allowing the shit-to-hit-the-fan hoping that the bankers would make a ton of money and

grow the economy out of this mess all on other people’s money!

The practice of re-hypothecation today runs into the trillions of dollars and is faultlessly legal under

current law. If Congress is not grandstanding once again, then write a statute and state banks and

brokers can do NOTHING with client’s assets whatsoever without a contract and payment for the use of

such assets. It can no longer be justified that banks and brokers on the basis that it is a capital efficient

way of financing their operations that amounts to trading illegally with other people’s money. Investors

in hedge funds should DEMAND that assets NOT be left on deposit in ANY Investment Bank right now

until this issue is clearly made illegal.

US broker-dealers have been making great use of their European subsidiaries since re-hypothecation is

so hugely profitable being free money. US client’s assets are being transferred to the broker dealer’s UK

subsidiary to circumvent US re-hypothecation rules. This means, that any US regulation must also

outlaw the transfer of US assets to any subsidiary offshore without contract with the client. At least in

the UK clients can negotiate the use of their assets whereas under subtle brokerage contractual

provisions in the USA, investors can find that their assets simply vanish not merely into thin air, but out

of the US and magically appear on the books in the UK, despite any contractual agreement with any

American broker-dealer. If a US branch enters an agreement with its UK branch, then the UK’s

unrestricted re-hypothecation rules then apply. This is how Lehman Brothers blew up so quickly

because it was doing this with Lehman Brothers International (Europe) (LBIE), where it had transferred

most of the assets of its hedge fund clients so they could leverage them to the max. Once assets were

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transferred to the UK based company, then they were re-hypothecated and when Lehman imploded,

client’s assets vanished.

Under US law, a broker dealer is under NO obligation to get a client to sign any agreement with a

European subsidiary to take advantage of the loophole. In the case of Lehman Brothers, the customer

agreements were signed with the US entity for brokerage, but margin-lending agreements and

securities-lending agreements were with the UK entity under a Global Master Securities Lending

Agreement. This enabled Lehman to transfer client assets between various affiliates without the hedge

fund’s actual consent or knowledge, despite the fact that the main agreement had been under US law.

This is how most of the firms clients’ assets mysteriously ended up in London. MF Global’s agreements

appear to be the same structure for trading in futures, options and forwards as well as securities. Clause

7 reads:

“7. Consent To Loan Or PledgeYou hereby grant us the right, in accordance with Applicable Law, to borrow, pledge, repledge, transfer, hypothecate, rehypothecate,loan, or invest any of the Collateral, including, without limitation, utilizing the Collateral to purchase or sell securities pursuant to repurchase agreements [repos] or reverse repurchase agreements with any party, in each case without notice to you, and we shall have no obligation to retain a like amount of similar Collateral in our possession and control.”

Clearly, the mechanism that blew the world up in 2007 has been allowed to thrive thanks to the SEC and

CFTC. This has been a well-known practice and this is WHY Princeton Economic was one of the biggest

buyers of Fannie Mae back in 1999 to defeat this practice. The problem was they were then selling the

Fannie Maes and not recording entries in the accounts. I was only able to ascertain what they were

doing when they mistakenly put $50 million in Fannie Maes back in the wrong account.

US regulators knew precisely what has been taking place. I believe this is why they created the contempt

and refuse to allow any trial because this would have been exposed back then. Even going back to Bill

Clinton, he allowed in 2000 the easing up of rules for the re-hypothecation funds to US Treasury, state

and municipal obligations allowing customer money could be used to enter into REPO market so by

2007, the mortgage backed time bombs were eagerly accepted.

This entire scheme of re-hypothecation creates tremendous problems for it sets the stage for the same

precise mechanism that blew up the world in 1931. Back then, the bankers sold foreign sovereign debt

in small denominations to depositors. When they defaulted, the collateral damage was to wipe out their

deposit base. Here we have people depositing funds, not even trading assuming T-bills are safe, only to

find out the broker dealer is using their deposits to trade. This then introduces substantial counterparty

risk for assets are being pledge when they have no title to them. Then we have the off-balance sheet

treatment which hides what the hell is going on and you just don’t know escalating the leverage that

cannot be easily determined turning this system of re-hypothecation into a staggering time bomb that

far exceeds even the mortgage backed securities debacle. This is creating a chain of counterparty risk

like a set of dominoes. Central Banks are incapable of dealing with this problem particularly when the

crisis is now engulfing the sovereign debt market.

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The annual reports reveal at least some idea of what is going on. Jefferies’ most recent Annual Report

stated it had re-hypothecated $22.3 billion of assets in 2011 out of $37 billion in capital. Goldman Sachs

re-hypothecated $28.17 billion in 2011, Wells Fargo $19.6 billion, JP Morgan $546.2 billion, and Morgan

Stanley ($410 billion). The Canadian Imperial Bank of Commerce “re-pledged” $72 billion in client

assets; Royal Bank of Canada “re-pledged” $53.8 billion, and Credit Suisse (CHF 332 billion). They are all

doing it. The question should be to be (re-hypothecated) or not to be! This should be illegal and the

banks should raise their fees and stop playing dice with other people’s money.

Collapse of the World Financial System

While the headlines have focused on how a Eurozone default would ravage the global economy

resulting in vast losses in Eurozone bonds taking down balance sheets of world banks felt across entire

global financial landscape, we must not ignore this shadow REPO market and the re-hypothecation that

is taking place. The collapse of MF Global is threatening even farmers’ ability to finance and hedge their

crops. Corporations cannot hedge exchange risk and foreign exchange markets can find themselves in

dire straits lacking liquidity. The re-hypothecation has surely increased the financial footprint of the

entire Eurozone bonds crisis and we could be on the verge of an apocalyptic year ahead in 2012.

The sheer volume of re-hypothecation has reached staggering levels and we must assume that assets of

customers are themselves being leveraged by 200-400% before we even get to the derivative levels of

leverage. The US bank holding of European sovereign debt is a tiny fraction below $200 billion of

Greece, Ireland, Italy, Portugal and Spain. The real danger is the off-balance sheet transactions emerging

from this re-hypothecation and REPO, of client assets as well as all European debt. The CFTC new rule

banning the use of client funds is limited to foreign sovereign debt, but is not outlawing re-

hypothecation all together.

In the aftermath of the MF Global debacle, we have seen how the Regulators (SEC & CFTC) do nothing to

protect the citizen. How can they allow firms to just take other people’s money without any agreement?

It was former Goldman Sachs’ Robert Rubin who got rid of Glass Steagall Act (The Banking Act of 1933,

Pub.L. 73-66, 48 Stat. 162, enacted June 16, 1933) when he became Treasury of Secretary. In this case

former Goldman Sach's Jon Corzine is blowing up the World Financial System and former Goldman

Sachs’ Gary Gensler, now currently head of the CFTC, pretends to recuse himself from an MF Global

investigation, yet in a unanimous vote, "The U.S. futures regulator approved on Monday a rule that

puts tighter limits on how brokerage firms can use customer funds, a measure that the now-bankrupt

MF Global had encouraged the agency to delay." So, the CFTC has thus condoned what Corzine did for

he can now say see, it was NOT illegal to trade with other people’s money before!

The entire world financial system is in dire need of reform before everything blows up. If you think the

Fed or any central bank can prevent a bank run, good luck. They don’t even know where the assets are.

We have a Sovereign Debt Crisis, but we also have a system where there may be no market level to even

trade. This is serious shit and does anyone remember what ethics is?

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End the corruption

Sir William Blackstone (1723-1780) wrote the foundation of law that was used to establish the United

States. He warned precisely the type of corruption that has consumed the United States legal system

that threatens the entire world economy by its inability to deal in an honest and forthright manner. He

wrote:

“For if judgments were to be the private opinions of the judge, men would then be slaves to their

magistrates; and would live in society, without knowing exactly the conditions and obligations

which it lays them under.”

Commentaries on the Laws of England, 1776, Book IV, Chp 29, p371

We are indeed slaves to the corrupt court of New York,

Regulators, and the Press. This deadly combination is lethal to

our property and liberty. Everything that once was decent

and honorable has turned to dust and fallen to the ground.

“[T]he power of the district courts to make rules is

confined to such as are ‘not inconsistent with any

law of the United States’, and it obviously would be

thus limited even without the statute.”

Johnson v Manhattan, 289 US 479, 503 (1933).

All the decent decisions are no longer followed because

EQUITY has superseded LAW. This has eliminated any

meaning to the right to vote for its matters not when judges

have crowned themselves with discretion. It is time to wake

up, for whatever law you enact through a representative in a

pretend democracy need not be followed by a judge. They assume the “discretion” not to prosecute

their friends. This threatens the viability of doing business in the United States altogether.

The Supreme Court wrote “advancement of the purpose of the [recusal statute] provision [is] to

promote public confidence in the integrity of the judicial process.” Liljeberg v Health Serv. Corp, 486 US

847, 859-860 (1988). Judges have ignored the law. Local lawyers are afraid to even ask for recusal

because the judge will retaliate and gets to preside as judge over himself. The Supreme Court also

acknowledged “Judges are as human as anyone and as likely as others to see the world through their

own eyes and find the ‘collective conscience’ remarkably similar to their own.” Goldberg v Kelley, 397

US 254, 276 FN6 (1970). It is time we clean house. As Jefferson said, there is no man to be trusted for

life. A judge MUST recuse if a party asks for it. If he dares retaliate, he should be disbarred. What has

happened to the clients at MF Global is outrageous. Both regulators and the CME were supposed to

prevent this. Both have utterly failed once again to do their ONLY job.

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